Sunday, November 2, 2008

Charles Morris in The Trillion Dollar Meltdown (the 2nd edition paperback at the printer's now reads "Two Trillion") covers the gambit of financial woes generated by the free hands of financial wizards. Don't read this book at bedtime: it is one long nightmare. Beyond the discussion of spurious new financial instruments, national debt and foreign investors and the unraveling of the markets, Morris asks some questions about human values that don't fit so neatly into the all-encompassing free-market ideology, including such social benefits as health and education.

Morris titles the section on college lending "Class Warfare" because of the correlation between education and economic opportunity. Sallie Mae, originally a government entity for offering student loans, became SLM Corp. and was privatized in 2004, a year in which it made a 37% profit.

Why are its profits so high? Because it is the beneficiary of extraordinary privileges. For one thing, 90 percent of the loans it makes are guaranteed by the taxpayer... Student lenders are exempted from all state usury laws; if a student defaults, fees, penalty interest, and collection charges skyrocket. Loan servicing by the student lenders is reputed to be very poor, and there are widespread reports of defaults occurring because student lenders make little or no effort to contact debtors when repayment periods start. Collection of student loans and credit card and other debts is now a separate SLM business line, and it racked up about $800 million in debt management fees in 2005.

Morris goes on to argue that there are smarter ways to finance higher education which offer more social benefit by taking it away from the profit-taking private sector. The direct federal loan program offers the same service for half the price, but the program has been contracted in recent years. He argues: "If all loans were financed through the direct loan program, the savings could finance full tuition grants for another million students." He also cites the historical precedents which show our traditional commitment to higher education, including Lincoln's land-grant college system and the GI Bill after World War II.

6 comments:

Sharon, I'm curious if you've spent much time looking at the studies of what has happened to college costs since the expansion of the federal government loan programs. The information I've seen (and I'll readily admit I haven't read primary sources on all this) suggest this may be one of those areas that (like so many counter-intuitive examples) an economist's perspective might be useful to mix in. Those studies suggest that, actually, the presence of an inexhaustable source of loans (the fed government programs) has had a significant role in the dramatic growth in tuition rates on the basis that schools no longer had to really compete on price, given that they could persuade students to borrow the difference.

BTW, this is one of the reasons why I hate throwing around terms like "free-market ideology" as much as I hate throwing around terms like "welfare state". When something goes wrong, people jump to labels before analysis. We don't live in an economy that is void of governmental intervention and regulation. We should, when we have a problem to analyze, be willing to consider the effects good/bad of all actors, including how intervention by the government may in fact distort what otherwise may have been acceptable behavior of private actors but for the intervention. Few people today now argue that government intervention to create artificially low interest rates (whether in the mortgage market directly, or in the credit markets generally) distorted people's evaluations of risk in ways that wouldn't have happened without the governmental intervention. Well, that possibility exists in all areas. So, whenever we analyze a problem, we cannot attribute it to merely a defect in free-market thought or a defect in statist approaches. We have to be open to the fact that we need to investigate, because we live neither in a free-market economy or a state-controlled one. We live in that more challenging place where the two blend.

Jack, Charles Morris didn't go into this subject at length. He used the privatization of college loans as an example of going overboard on deregulation. You don't think there has been some ideology driving the deregulation?